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California Supreme Court Sets Up Showdown at U.S. Supreme Court over Arbitration Agreements

by Peter Huang
July 2017 Peter Huang

In April 2017, the California Supreme Court unanimously held in the case of McGill v. Citibank NA that an arbitration agreement waiving the right to public injunctive relief in any forum contradicts California public policy.  It held that such a waiver is thus unenforceable under California state law.  The California Supreme Court reversed a state appellate court decision to the contrary and this battle will almost certainly continue in the United States Supreme Court.  The McGill case has gained a great deal of attention and should be of interest to many people in the ADR community.

Our story begins in the Superior Court of Riverside County.  A credit cardholder Sharon McGill sued Citibank for unfair competition and false advertising regarding a credit insurance plan that she had purchased.  Citibank petitioned the trial court to compel McGill to arbitrate her claims based on an arbitration provision in her account agreement.

The trial court granted the petition to compel arbitration as to McGill's claims for monetary damages and restitution.  However, it denied the petition as to her public injunctive relief claims related to various California state consumer protection laws. In doing so, the trial court relied on the “Broughton-Cruz” rule.  (The Broughton-Cruz rule is named after the decisions in Broughton v. Cigna Healthplans and Cruz v. PacifiCare Health Systems, Inc.  In those cases, the California Supreme Court held that agreements to arbitrate certain types of claims for public injunctive relief are not enforceable in California).

Subsequently, a panel of the Court of Appeal reversed the trial court decision and ordered all of McGill's claims to arbitration. The panel held that the Federal Arbitration Act (“FAA”) preempted California’s Broughton-Cruz rule.  It relied heavily on the U.S. Supreme Court’s decision in AT&T Mobility v. Concepcion which applied the FAA and found that federal law preempts state law when deciding if class action waivers are enforceable.

Not surprisingly, this bitterly-contested case reached the California Supreme Court.  Justice Ming Chin wrote the unanimous opinion which reversed the court of appeals and held the disputed Citibank arbitration agreement unenforceable.  So what were some of the highlights of that decision?

The decision turned on language in the arbitration agreement that purported to preclude McGill from seeking public injunctive relief in any forum whatsoever.  In an interesting twist, the California Supreme Court used that language to hold that the Broughton-Cruz rule was not even at issue in the McGill case.  More specifically, it reasoned that the McGill parties had essentially agreed to completely exclude public injunctive relief and that the Broughton-Cruz rule applies only when parties have agreed to arbitrate requests for such relief.

The California Supreme Court then went on to focus heavily on a general contract defense.  It held that the Citibank arbitration agreement would seriously compromise the public purposes that various consumer protection statutes were intended to serve and that the Citibank arbitration agreement therefore violated California public policy.  The Court stated that California law allows a person to waive the advantage of a law intended solely for that person’s own benefit but does not allow a private agreement to contravene a law established for a public reason.  It concluded that the waiver of the right to seek public injunctive relief was thus unenforceable. 

The California Supreme Court then turned to the FAA and the aforementioned Concepcion case.  It primarily relied on the “saving clause” (also sometimes referred to as the “savings clause”) in the FAA which permits arbitration agreements to be declared unenforceable upon such grounds that exist for the revocation of any contract generally.  The Court emphasized its view that the issue at hand was one of general contract analysis instead of an arbitration-specific issue under federal law.

To that end, the California Supreme Court repeated its position that generally speaking any provision in any contract — even a contract that has no arbitration provision at all — that purports to waive in any forum the statutory right to seek public injunctive relief under the relevant consumer protection statutes is unenforceable under California law.  It concluded that the FAA did not require enforcement of such a provision simply because that provision was inserted into an arbitration agreement.  

So, what’s next?  In recent years, the arbitration of consumer disputes has been a topic of interest at the United States Supreme Court.  So Citibank almost certainly will appeal this case to the highest court in the land and this legal battle will probably continue for some time.  Stay tuned for more developments next year.

Biography


Peter O. Huang is a California attorney and mediator. He is a 1999 graduate of U.C. Berkeley’s law school and has been practicing law for over a decade. Peter has extensive litigation experience in a variety of areas. He is a mediator who focuses on commercial litigation, intellectual property disputes, employment cases, and matters involving Chinese parties.



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